10.

Reserves for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”), net of reinsurance, to the gross amounts reported in the Consolidated Balance Sheets. Reinsurance recoverables in this note exclude paid loss recoverables of $142.7 million and $106.5 million as of September 30, 2013 and 2012, respectively:


	For the Nine Months Ended September 30,
(in millions)	2013			2012
Net reserves beginning of the year	$	2,110.9		$	2,336.7
Add:
Net reserves from assumed retroactive insurance contract ⁽¹⁾		0.0			13.0
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year		575.6			545.7
Prior accident years		(21.5	)		(17.8	)

Losses and LAE incurred during calendar year, net of reinsurance		554.1			527.9

Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year		131.7			111.9
Prior accident years		429.0			450.1

Losses and LAE payments made during current calendar year, net of reinsurance:		560.7			562.0

Change in participation interest ⁽²⁾		10.4			(3.1	)
Foreign exchange adjustments		(6.3	)		5.4

Net reserves - end of period		2,108.4			2,317.9
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period		1,114.5			910.0

Gross reserves - end of period	$	3,222.9		$	3,227.9

(1)	Amount represents reserves assumed resulting from participation in Brazilian Motor Third-Party Liability Insurance Pool effective January 1, 2012.

(2)	Amount represents (decrease) increase in reserves due to change in syndicate participation.

Included in losses and LAE for the nine months ended September 30, 2013 was $21.5 million in favorable prior years’ loss reserve development comprised of the following: $26.8 million net favorable development in the Excess and Surplus Lines segment primarily caused by favorable development of $35.9 million in the general and products liability lines, partially offset with $9.1 million of unfavorable development in commercial automobile; $0.4 million of net unfavorable development in the Commercial Specialty segment, primarily driven by $11.4 million unfavorable development in general liability due to increases in claim severity and $2.4 million unfavorable development in automobile liability, offset by $6.7 million favorable development in short tail lines and $5.8 million favorable development in workers compensation; $0.6 million net favorable development in the International Specialty segment primarily driven by $3.0 million of favorable development on professional lines due to favorable loss activity and $1.2 million on assumed contract from older years, partially offset by $2.6 million of unfavorable development from a marine industry loss warranty and crop losses and $0.8 million in unfavorable development in our Brazil unit; $4.1 million net favorable development in the Syndicate 1200 segment driven by favorable development in various property classes, partially offset by unfavorable development in the onshore energy and liability classes of business; $9.6 million unfavorable development in the Runoff Lines segment primarily caused by $6.4 million of unfavorable development in asbestos driven by an increase in defense costs for claims from general liability policies written on a direct basis and commutation and settlement activity and $2.0 million of unfavorable development in the medical malpractice liability line due to the loss of the New York Liquidation Bureau funding for structured settlement annuity payments.

Included in losses and LAE for the nine months ended September 30, 2012 was $17.8 million in favorable prior years’ loss reserve development comprised of the following: $33.5 million of favorable development in the Excess and Surplus Lines segment primarily driven by $23.6 million of favorable development in the general and products liability lines of business in accident years 2009 and prior, $3.1 million of favorable development in the property lines, primarily in accident year 2010 and $2.4 million of favorable development in the automobile liability lines of business, primarily in accident year 2009; $18.6 million of net unfavorable development in the Commercial Specialty segment driven by $24.9 million of unfavorable development in general liability due to increases in claim severity, $3.8 million of unfavorable development in the automobile liability lines of business, partially offset by $7.7 million of favorable development in workers compensation and $2.4 million of favorable development in short-tail lines; $4.5 million of net favorable development in the International Specialty segment primarily driven by favorable development attributable to short-tail non-catastrophe losses; $4.4 million of net favorable development in the Syndicate 1200 segment primarily driven by favorable development in the property facultative class of business, partially offset by unfavorable development in the general liability class of business; and $6.0 million of net unfavorable development in the Run-off Lines segment primarily due to $5.5 million of unfavorable development in asbestos driven by increasing defense costs, unfavorable development in other run-off lines, partially offset by favorable development in workers compensation and legacy PXRE claims.

In the opinion of management, our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future loss development, favorable or unfavorable, will not occur.